Building Suburbs That Last #3 – The Mother of All Impact Fees

I consider the suburban decay facing inner ring suburbs across America, especially those of the 60’s and 70’s vintage built on a modern suburban pattern, as one of the key challenges facing urban leaders over the coming decades. I outlined a lot of the case in my review of the book “Retrofitting Suburbia”.

Why is this happening? One big reason cities tend to fall into decline is that they accumulate huge unfunded liabilities, and those liabilities attach to the territory, not the people. This lets one generation of residents rack up huge future bills, then skip town to leave the next generation or those not lucky enough to get out with the bill. It’s the equivalent of being able run up a huge balance on the civic credit card, then pawn the bill off on someone else.

Consider the $1 billion pension time bomb that was facing the city of Indianapolis for its pre-1977 police and fire pensions. I think it’s fair to say that no one who was not yet eligible to vote prior to 1977 played a role in making unfunded promises on the future. Many of the people who did simply moved outside of the district as part of the great suburban migration. That’s why it is entirely proper that the state picked up this cost, so that residents who fled the central city for the suburbs after running up that debt have to contribue towards paying it off.

This problem is more acute in suburbs that fall into decline than it is in cities. City living might always appeal to a minority, but because we are not building many new neighborhoods today, those that prefer urban living have to do it in the city, thus there is built in redevelopment demand. This is not true for suburbs, where there is always a shinier, newer product being built somewhere in the region, without all the legacy problems. To the extent that living tastes change significantly – say, in favor of New Urbanist developments – this only obsoletes older places more quickly. Plus, regions tend to see propping up their central city’s urban core as an imperative, but don’t feel the same way about a random suburb’s problems. Almost all of the serious urban research, thinking, and funding has been oriented towards urban, not suburban problems.

I have a couple of practical recommendations in my previous two entries in this series (see #1 – Strategy and #2 – New Urbanism and Parcelization). The next two installments are more speculative. They would require significant development and piloting before implementation, and would likely require state level legal changes. But we can at least think about them.

These two items deal with preventing the accumulation of unfunded liabilities, and how to partially compensate when they do happen.

Portland, Oregon is famous for its urban growth boundary that restricts urbanized developement to the side of an arbitrarily drawn line on the map. This is a solution that has been proposed to control sprawl in many locations, but I’m not sure it is politically practical in most cases. And I think there is a better way to do it, one I call “The Mother of All Impact Fees”.

Impact fees are fees charged to developers, typically residential developers, to help fund the capital expansion needs of public services such as sewers, parks, or roads resulting from the new housing units that will be added. This can be thousands of dollars per house in total. Also, developers are often required to construct 100% of utilities and infrastructure in the interior of their development, donate land for schools or fire stations, or even do localized road improvements. The idea is that the construction of the house creates a muncipal liability that would otherwise be unfunded without the fee.

There are a couple of problems with impact fees. The first is that they are imposed on a locality by locality basis. Competition is good, but competition can also force all but the most attractive towns to limit their collection in order to entice developers. This creates economic development in the short term, but adds to the unfunded liability balance that will ultimately do in the city. The second problem is that these fees are not nearly high enough.

An externality is a cost or benefit (often a cost) that accrues to someone not party to a transaction, I think even most free marketers would suggest that externalities are a problem. In this case, the unfunded liabilities are negative externalities of development. The developer pockets the vast bulk of all of the profits and benefits flowing from his new subdivision. The residents of the whole town, both today’s and tomorrow’s, and even state and federal taxpayers, inherit the bill to make good on these costs.

Think about a typical rapidly growing suburb such as Westfield, Indiana. Westfield had a population of 3,304 in 1990, 9,293 in 2000 and an estimated 20,459 in 2007. Over 10,000 new housing lots have been approved for construction, though obviously the current recession has affected the timing of actual build. Let’s consider some of the growing pains in a town like Westfield:

Updating the structure of local governance to be suitable to a large town, not a small one. (Westfield just went through a town to city conversion)

Sewer and stormwater management buildout

Water buildout

Parks buildout

Roads buildout

Schools buildout

Fire department buildout and professionalization. (Most rural and small town Indiana areas are served by tiny volunteer fire departments at an ISO rating of 9)

Police department buildout

Library buildout

Some of these, such as sewer and water buildout, often are taken care of at the time of building. It’s tough to build a house without sewer or water service. (New subdivisions on septic service are increasingly rare in Indianapolis these days).

But let’s consider roads. Westfield, by its own estimation, is on its way to 75,000 people. But as a town it has effectively implemented no road improvements. Virtually its entire road network consists of unimproved county roads with narrow lanes, drainage ditches, no sidewalks, poor traffic control, etc. It should come as no surprise that traffic congestion is horrible.

The cost of improving even two-lane arterials is significant. Based on what neighboring Carmel has spent, one could estimate $3.5 million per mile without extensive aesthetic treatments. This is hundreds of millions of dollars in unfunded road work.

But that is only half the story. 146th St., the main arterial on the southern border of Westfield, is controlled by the county, which has already spent $100 million or so improving it, with plans to spend another $45 million completing the cross-county widening. Westfield’s Main St. is 176th St., or SR 32, which is controlled by the state. That road requires over $150 million of improvements, which INDOT has not nearly funding it needs to complete. US 31, the main north-south corridor, is also a state road. There is a project in the works to spend $450 million upgrading that to a freeway through Carmel and Westfield. US 31 empties onto I-465 at the south, which also has $650 million in improvements planned, with probably another $450 million needed that aren’t even on the books yet.

It probably isn’t totally off base to suggest that Westfield alone is probably generating a billion or so in road construction needs as a result of its projected buildout. Maybe more. Is it going to build these roads with impact fees from developers? It doesn’t seem likely given that there are over 20,000 people there and we’ve yet to see any serious road improvements. In effect, these developers have been able to get the taxpayers of the future to subsidize their developments to the tune of a billion or more in roads alone, to say nothing of all the other services above. And that’s just to build them, not maintain them.

My proposal is to put a stop to that by charging developers up front the full cost of the total infrastructure buildout their developments create. You could do this in a couple of ways:

Do not allow new urbanized development until the infrastructure and urban level services to support it – including macro level infrastructure such as freeways – are in place. Perhaps a minimum level of infrastructure plus a credible and funded plan to get to full buildout would suffice.

Take an area like Westfield (Washington Township), do a comprehensive plan, estimate what a full buildout would look like and cost, then divide by the number of projected units and voila, there’s your impact fee.

Nothing against Westfield, which is just playing by the rules it has been given and isn’t a bad place. (In fact, they know they are behind and are pedaling hard to catch up). But the reason development there looks attractive is, in part, because of the artificially low taxes in the now that result from being able to run up future liabilities. Pull the present value of that forward and tack it on the sale price and things look much less rosy.

And many of the purported ills of the older areas people are moving to Westfield to get away from are nothing more than the debts of previous generations of Westfields that did the same exact thing coming due. If Westfield thinks its fate will be any different in 25-30 years when it achieves full buildout and is no longer the great new thing, it is sadly mistaken. Of course, by the then, it won’t matter to the people and developers who got the benefit of 20 years of deferred liabilities. They’ll be on to the next place when things head south.

A policy that prevented towns from being able to run up huge deferred infrastructure liabilities, and forced developers and homeowners to pay for them up front or over some reasonable implementation period, might prove to be the best limiter of sprawl out there.

Such a policy would likely need to be at the state level. This is where the devil is in the details. One size fits all policies that mandated identical infrastructure, etc. probably isn’t wise. We shouldn’t expect every town to by gold plated infrastructure. We should be encouraging specialization and diversity in our suburbs. Also, with much infrastructure in non-muncipal hands, the process would need some work. I’m sure there are plenty of good policy minds out there who could help develop some ideas to take forward to pilot.

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So if I'm understanding this correctly a full build out of Westfield would result in a population of 70,000. Assuming their current roads/sewers etc can easily support 20,000 (just a guess) the town would need to build out to support an additional 50,000 people. Assuming 2.5 people per household the impact fee per housing unit would be roughly $50,000 (1 billion/20,000 new houses).

I think this is a very good idea and it would surely reduce sprawl if people were forced to pay the true cost up front. You brought up the question of competition though. In order for this to work it seems that something would have to pass at a state level forcing various municipalties to implement something similar to insure a level playing field. Unfortunately in the current political environment in Indiana I couldn't see this happening. The state doesn't take stands for forced regulation of "business" very often. I do hope things change though.

I think you would be hard pressed to find anywhere in the country where such a law could be passed. Here in Michigan, the builders lobby has been successful in blocking any efforts at the state level to allow local governments to impose impact fees. Michigan courts have ruled that impact fees and similar measures like parkland dedication requirements are illegal absent enabling legislation by the state. The lack of impact fees has been one more reason why Michigan's become uncompetitive over times as local governments have had to raise taxes to cover the cost of growth. The builders and developers have such a huge financial incentive to stop such legislation, they'll pull out all of the stops to block such laws. Plus, you can bet they would be in court in a heartbeat challenging the constitutionality of any such laws on the basis of takings and proportionality if such laws were ever passed. I agree 100% with the basic premise. But I don't think it would ever come to pass.

Ok, here is a more radical suggestion. Let's go back to the system of road funding used two centuries ago: private toll roads. On e upon a time, highways were funded almost entirely by private tolls rather than public funds. In that system the users of the road bear the direct cost of it's operation. Maybe we should try that again: make people pay directly for the services they use.

Given what Anonymous 10:58 says about the political difficulty of impact fees, perhaps Portland's approach isn't so politically unpalatable after all? It has, after all, happened in Portland. Whether it is preferable on its own merits, of course, is another question.

Also, Re:Stephen Gross – that approach to road-building (public/private, at least) is once again becoming the norm in Southern California and now in Arizona. Unfortunately, that doesn't do everything for a suburb that has to develop non-freeway roads as well.

The highest impact fee in the nation that I am aware of is a $33,000 per unit fee in Naples, Florida. Ouch!

Plus, I'm not sure if a $50,000 would stand up to judicial scrutiny.

Judges review impact fees using what is called the dual rational nexus test (or similar tests). The test requires: (1) a showing that the development is actually creating the need for the infrastructure improvements and (2) earmarking the fees to benefit the development.

A blanket $50,000 fee to fund all road improvements – including highway improvements – probably won't pass the test. Why? Even if you get passed the first prong (which is questionable), you're likely dead on the second because, at least with the funding of highways and major arterials, the benefits are too broad. Essentially you are asking purchasers of new homes (developers are not going to pick up the tab) to bear the entire burden of highway improvements that benefit everyone. They can only be required to pay the proportional share of the need they actually create. Some real calculus can be done and numbers can't just be plucked out of the air.

If the calculus is done and there is a strong nexus between the impact of the development and the capital needs generated, reasonable impact fees aren't a bad idea. Even then, we have to consider that the high fees (and urban growth boundaries, for that matter) make new housing and new suburbs even more unattainable by the economically disadvantaged, which is already a real problem.

He always said that capital is extremely "chunky". You can't build a road to serve only one person or one house…except a driveway.

Roads and highways, as public goods, cannot meet a "marginal cost" hurdle even though policymakers have tried. Public goods have to be considered on an "average cost" basis.

This takes advantage of the law of large numbers. If the 20,000 people already in Westfield make this many trips per day on arterials and freeways, it's valid to assume that newer residents will consume a similar amount of roadway services. Good statistical studies are necessary, but eminently doable.

Sure, you can't calculate the marginal cost of each person. Averages are fine as as long as they are reasonable. I'm leery, however, of plans like Urbanophile's which seem to dump ALL the costs of growth and population increase on new home buyers, and too often do so with sloppy math (like Zionsville last year).

I agree with Urbanophile that Indianapolis area cities have not done a good job of funding and improving infrastructure in response to growth. Higher impact fees could help, especially if teamed with better suburban city planning.

But, going forward, existing residents can not require new move-ins pay for all the improvements that they think are necessary, that they will benefit from, and they they failed to pay for in the first place.

It might not be fair, but it would be wholly legal. Just like the Portland UGB.

I do concede that any new fee of the magnitude proposed by Aaron should make an allowance for starting conditions…and try to introduce SOME element of marginal change at start-up. In other words, it should phase in over five or ten years.

URBANOs proposal is totally appropriate and necessary. New development (residential and commercial) SHOULD shoulder much of the cost of infrastructure improvements brought about by new development.

I am glad to see people arguing the numbers. I will add that developers will develop more economically if the average cost of a NEW home goes up. For instance placing development where infrastructure exists and is UNDER utilized would bring the magical "per house" number down. Examples of this surrounding Marion County are numerous. Certainly a 4000 sqft house will still be great places to live with a 3500 sqft haircut.

Impact fees can backfire. Because developers have to pay for infrastructure, they prefer to build as little of it as possible. This translates to cul-de-sac development, which allows them to sell more units and build less roads and sewer pipes than a traditional urban grid. The few arterial through-roads get clogged very quickly, so the subdivisions are impossible to densify, forcing developers to build more sprawl further out. Chris Bradford, the Austin Contrarian, has proposed regulations requiring some measure of interconnectivity within every subdivision, effectively banning cul-de-sacs.

In Maryland, they use another type of regulation to limit sprawl: restrictions on conversions of farmland into suburbs. I don't remember the details, but the idea is that every rural acre comes with a set amount of development rights, which the owner can sell to be used anywhere. Thus a developer can buy development rights in New Carrollton from a farm far outside the Beltway, which is then protected from urban development until it buys the development rights from another farm.

Alternatively, you could just levy high taxes on gas. Greg Mankiw argues that based on local pollution alone, that is excluding CO2 emissions, the appropriate externality-balancing tax is $2.20 per gallon. Most developed countries go further and levy taxes in the $4/gallon region. This discourages people from living too far away from where they work; it also discourages them from buying large cars, which wear the roads much more than smaller cars.

High taxes on gas affect everyone, not just those who buy into suburban sprawl.

The fairest impact fees are (1) economically justified, (2) applied directly to the source of the impact, and (3) levied by and remitted to the unit of government which designs, constructs and maintains the infrastructure in question.

Higher taxes on motor fuel are appropriately part of a much larger national debate on the future of transportation. They would, of course, indirectly have some impact on suburban sprawl, but the revenue wouldn't go to the unit of government in charge of (sub)urban form or infrastructure.

"In Maryland, they use another type of regulation to limit sprawl: restrictions on conversions of farmland into suburbs."

This is the approach Ann Arbor, Michigan has taken. Frustrated by the lack of regional coordination of development in Michigan and the failure of a countywide Purchase of Development Rights millage a few years prior, the city successfully passed a "Greenbelt" millage in 2003, which gives the city the funds to acquire development rights on farms in the surrounding townships where most of the suburban sprawl has occurred. In some ways, this is better than an urban growth boundary as it reduces the inventory of potential development locations in the surrounding townships, making development locations in the city more attractive (and more valuable). There was concerns raised about local control with the city "imposing" its vision on the surrounding communities. But instead, several of the surrounding townships have passed their own PDR millages allowing them to partner with the city in acquiring development rights. The city has recently started partnering with a couple of local land conservancies who also have been active in acquiring easements and purchasing development rights on AG and natural areas surrounding the city. The goal isn't to create a wall around the city but to protect key blocks of AG land to keep them from being fragmented through development. It also helps the outlying townships to channel growth to defined areas to reduce the future costs caused by growth. More info. about the greenbelt program here:

Thundermutt said, "The fairest impact fees are (1) economically justified, (2) applied directly to the source of the impact, and (3) levied by and remitted to the unit of government which designs, constructs and maintains the infrastructure in question."

I completely agree but would go one step further; Every town, city region is unique and no one solution will fit all. In many cases the small impact fees and donated land from the developer to the city more than offset costs according to baseline average expenses from the year built and in fact the properties go on to generate huge reoccurring revenues for decades that should, according to the baseline, allow for balanced budgets. The bigger, although certainly not always, problem I would argue is the municipal, state and county employee unions more often than not grow their benefits and pay obligations by a far greater rate than the original baseline average from the times towns are built leading to local versions of the State of California. Economists would argue the more the population paying taxes they should have more and more purchasing power but this isn't the case, it is in fact becoming the opposite, and somehow a fail to see how land developers can be the root cause 30 years later. Inflated promises, deferred maintenance and general incompetence by most municipalities is a larger problem than the builders. For example, in suburban Cook County in an old inner ring suburb it recently cost us $35,000 to move a single street light 36 inches. 3 feet. Not a new pole, not new wiring, just disconnect and move and reprogram. Tasks like this used to be done in a day or by a city crew for salary for far less. So if the crews have become slower and more expensive than the historical rates how do you account for that up front? A generalized rate of future incompetence factor?

Brilliant post. We're probably getting close to this standard in a piecemeal fashion in my town with a total of around $35,000 in connection and impact fees.

But you're right that there's too much downward pressure on those fees. A statewide mandate would preferable.

One thing I'd note that I think is implicit in your suggestions, but should be said, is that you need different fees for different areas. Infill should be encouraged and naturally requires less new infrastructure, whereas greenfield development in the outskirts should pay more since it creates more of a burden

"The bigger, although certainly not always, problem I would argue is the municipal, state and county employee unions more often than not grow their benefits and pay obligations by a far greater rate than the original baseline average from the times towns are built leading to local versions of the State of California."

Do you have any numbers to back up that claim? No doubt that employee obligations are a potential source of unfunded liability for local governments. But the cost for employee pensions and health care pale in comparison to the long-term costs associated with infrastructure, at least in the communities where I've lived.

Lets assume 1 mile of feeder road to serve a new development of 120 new homes on 30' plots. Not an unreasonable assumption at all in fact low density. There's about 95,050 Cu/Ft of concrete pavement to build at $25 cu /yd ( Means Cost 2007 ) so total road = $264,00 + lighting comes to about $500K. Concrete pipe and trenching about $100 lineal foot added to that is about $1,028,000

1,028,000 should last 20-30 years with maybe 1 or 2 surfacing jobs. Remember I used concrete pavement – most places are much cheaper asphalt paving on compacted subgrade.

1,028,000 / 30years is about $34,266 a year for this development.

120 homes x $3000 tax bill a year = $360,000 / year.

The infrastructure is about 9-10% to spread over the 30 year life. Concrete pipe can last 50 years. And a portion of this is paid by the developer anyways already so the percentage is maybe less.

So this leaves these 120 homes with a surplus $325,734 leftover each year for other services such as fire fighter, cop and a teacher costing $67,000, $75,000, and $40,000 respectively. That's $182,000 / year for these three employees' base salaries. About 50% the total tax revenues these 120 homes generate. So theres still 40% left. Where is it going in town after town? New high schools to replace the modern ones built just 30 years ago? New libraries when they already have them? Yes in a lot of places but also many of these employees are promised full salary or 80% through death which could be equal to the number of years worked effectively doubling the cost! I don't know about you but Id love a deal like that. 1 day on 2 days off or summers free plus guaranteed retirement incomes.

Im just saying that raising the bar TOO high to thwart development will disproportionately kill future revenues by making new homes too costly thus losing out on years of future revenues. And sure as the sun rises if you give a public entity money up front to offset future costs they will spend it before it's needed anyways.

Sorry for the long post. Interesting problem, I hate sprawl to but I think the issue is more that older suburbs in manufacturing cities, the sprawl of their times, face deteriorating tax multipliers for other reasons, often socio-economic or racial in addition to entrenched labor interests.

Also its been in my experience as a construction professional that green field developments' utilities hookups and repairs are 30-50% less than urbanized areas just because of hassle factors of existing conditions such as a gas company and phone company laying main lines right over the sewer you need to tap into. And utility companies aren't cheap to get things temporarily moved. The one thing that we could say about the newer larger developments versus the postwar is there's more thought put into future placement and repair of utilities and they are less likely to be layered than a development from the 50's – the trade off is they gobble up more dirt.

Secondly, My guess is that collector street improvements are probably minor. They probably could be left as semi-improved country roads indefinitely. The biggest expenses on roads have nothing to do with the locality, however. It is these hugely expensive arterial streets and freeway upgrades. I'm not familiar with your example, but just upgrading the street non-municipal streets I mentioned in Westfield (146th St., SR 32, and US 31) is $650 million, excluding beltway improvements.

I definitely don't want to discourage the development of affordable housing. Here's the issue for me. You want affordable? Vast tracts of our cities and inner ring burbs have nearly free housing. They have problems to be sure, but those problems need to be seen as the inevitable end result of the current development policies. The old suburbs and the new are nearly the same, just at different points in their lifecycle. I believe we need to take a lifecycle view of things, not just a near term view. Unless, of course, we want to plan on a policy of perpetual abandonment every 25 years or so.

Thanks Urbanophile. The sophistication of debate on this board is probably 10x greater than the average county board. Im not familiar with the county you give as example but a major artery can skyrocket if it has grade seperated intersections. Bridges throw all numbers out the window.

Marko, you looked at only the variable costs for city services beyond the capital cost of the road. You also didn't consider plowing in the winter as part of the operating cost of the road.

What about the capital costs for the school and bus, the fire station and equipment, the park improvements, the water and sewer mains and plants, the library and books, and the city hall? All those have to be figured into the impact fee.

Re schools: If you double the number of HS kids over 30 years, you either need one whole new school (as Hamilton SE did in Indy Metro area) or to constantly rehab and add to your single school (as North Central and Carmel have done). Again, capital cost is "chunky" either way.

Suburban localities don't start out with retirees…but after 20 or 30 years of growth, suburbs mature into cities and employees reach senior pay and retirement.

No one is content with a starter salary for a whole career; as the city grows it promotes people to senior technical staff and middle management and also pays its department heads more. Likewise with professional firefighters and police.

That's why over the life cycle of a boomtown suburb the personnel costs rise so much more than "inflation".

Frankly, it's this last part that economically justifies cities like Columbus snatching up suburban territory: they already have mature planning staffs, sewer and water department infrastructure, streets department, etc.

They can add junior level staff to accommodate expansion, and their incremental "government services" costs will be much closer to marginal cost than average cost, and increases will be closer to an inflation measure over time than for developing boomtown burbs.

I'm a little late in the ballgame here, but I'd like to throw in some info. Westfield sees it's build out around 90k. It has a plan to densify its downtown area called the Grand Junction. Not a great plan, but a plan nevertheless. I remember being at a city council meeting where the discussion was raising the impact fees. They did raise it, but not as much as it should be. BAGI was present at the meeting and showed its presence (pressure). The developers just pass this fee onto the homeowners or the leasee. I don't believe the traffic is as dire as mentioned, but Westfield will have to catch up soon. Westfield is going to approve its newest TIF, which may help the roads, but is greatly advantagous to the developers (not paying their share).

About Aaron M. Renn

Aaron M. Renn is a Senior Fellow at the Manhattan Institute and an opinion-leading urban analyst, writer, and speaker on a mission to help America’s cities thrive and find sustainable success in the 21st century. (Photo Credit: Daniel Axler)